Filed by Bowne Pure Compliance

United States
Securities and Exchange Commission

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended November 1, 2008

Commission File No. 1-6695

Jo-Ann Stores, Inc.

(Exact name of Registrant as specified in its charter)


Ohio (State or other jurisdiction of incorporation or organization)		34-0720629 (I.R.S. Employer Identification No.)

5555 Darrow Road, Hudson, Ohio		44236
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (330) 656-2600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Shares, without par value, as of December 1, 2008:25,855,415

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Jo-Ann Stores, Inc.

Consolidated Balance Sheets


	(Unaudited)
	November 1,			November 3,			February 2,
	2008			2007			2008
	(Dollars in millions, except share and per share data)
Assets
Current assets:
Cash and cash equivalents	$	24.8		$	29.4		$	25.4
Inventories		522.3			570.9			472.2
Deferred income taxes		24.9			29.4			26.4
Prepaid expenses and other current assets		29.0			24.3			23.8

Total current assets		601.0			654.0			547.8

Property, equipment and leasehold improvements, net		311.6			301.9			297.5
Goodwill		11.8			—			11.8
Other assets		13.9			9.9			12.3

Total assets	$	938.3		$	965.8		$	869.4


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	182.6		$	186.4		$	145.3
Accrued expenses		94.9			67.6			97.1

Total current liabilities		277.5			254.0			242.4

Long-term debt		112.7			202.0			100.0
Long-term deferred income taxes		—			16.2			—
Lease obligations and other long-term liabilities		93.0			82.7			87.0

Shareholders’ equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued		—			—			—
Common stock, stated value $0.05 per share; 150,000,000 authorized; issued 28,859,179; 28,071,432 and 28,072,032 shares, respectively		1.4			1.4			1.4
Additional paid-in capital		209.5			193.0			194.6
Retained earnings		290.0			261.0			288.5

		500.9			455.4			484.5
Treasury stock, at cost; 3,662,786; 3,586,206 and 3,586,872 shares, respectively		(45.8	)		(44.5	)		(44.5	)

Total shareholders’ equity		455.1			410.9			440.0

Total liabilities and shareholders’ equity	$	938.3		$	965.8		$	869.4

See notes to unaudited consolidated financial statements

Jo-Ann Stores, Inc.

Consolidated Statements of Operations

(Unaudited)


	Thirteen Weeks Ended					Thirty-Nine Weeks Ended
	November 1,			November 3,		November 1,			November 3,
	2008			2007		2008			2007
	(Dollars in millions, except share and per share data)

Net sales	$	480.1		$	480.2	$	1,329.2		$	1,292.9
Cost of sales (exclusive of depreciation and amortization shown separately below)		244.8			249.7		695.3			684.4

Gross margin		235.3			230.5		633.9			608.5

Selling, general and administrative expenses		199.5			199.1		575.6			572.7
Store pre-opening and closing costs		4.7			1.5		10.0			6.6
Depreciation and amortization		13.8			13.2		40.1			38.6

Operating profit (loss)		17.3			16.7		8.2			(9.4	)
Gain on repurchase of notes		(2.1	)		—		(2.1	)		—
Interest expense, net		2.6			3.9		7.2			9.3

Income (loss) before income taxes		16.8			12.8		3.1			(18.7	)
Income tax provision (benefit)		6.6			4.8		1.6			(6.6	)

Net income (loss)	$	10.2		$	8.0	$	1.5		$	(12.1	)


Net income (loss) per common share — basic	$	0.41		$	0.33	$	0.06		$	(0.50	)


Net income (loss) per common share — diluted	$	0.40		$	0.32	$	0.06		$	(0.50	)


Weighted average shares outstanding (in thousands):
Basic		25,044			24,407		24,792			24,247

Diluted		25,738			25,011		25,435			24,247

See notes to unaudited consolidated financial statements

Jo-Ann Stores, Inc.

Consolidated Statements of Cash Flows

(Unaudited)


	Thirty-Nine Weeks Ended
	November 1,			November 3,
	2008			2007
	(Dollars in millions)
Net cash flows provided by (used for) operating activities:
Net income (loss)	$	1.5		$	(12.1	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		40.1			38.6
Deferred income taxes		(0.5	)		14.2
Stock-based compensation expense		7.2			6.9
Amortization of deferred financing costs		0.7			0.7
Loss on disposal of fixed assets		0.9			0.7
Gain on repurchase of notes		(2.1	)		—
Changes in operating assets and liabilities:
Increase in inventories		(50.1	)		(117.5	)
(Increase) decrease in prepaid expenses and other current assets		(5.2	)		6.1
Increase in accounts payable		37.3			38.9
Decrease in accrued expenses		(2.2	)		(18.4	)
Increase (decrease) in lease obligations, net		6.1			(1.8	)
Decrease in other long-term liabilities		(0.1	)		(0.6	)
Other, net		1.3			0.4

Net cash provided by (used for) operating activities		34.9			(43.9	)

Net cash flows used for investing activities:
Capital expenditures		(55.1	)		(29.4	)

Net cash used for investing activities		(55.1	)		(29.4	)

Net cash flows provided by financing activities:
Purchase of senior subordinated notes		(18.0	)		—
Net change in revolving credit facility		33.1			76.7
Proceeds from stock-based compensation plans		6.0			7.7
Other, net		(1.5	)		(0.1	)

Net cash provided by financing activities		19.6			84.3


Net (decrease) increase in cash and cash equivalents		(0.6	)		11.0
Cash and cash equivalents at beginning of period		25.4			18.4

Cash and cash equivalents at end of period	$	24.8		$	29.4


Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	8.5		$	9.9
Income taxes, net of refunds		2.2			(7.3	)

See notes to unaudited consolidated financial statements

Notes to Consolidated Financial Statements (Unaudited)

Jo-Ann Stores, Inc.

Note 1 — Basis of Presentation

Jo-Ann Stores, Inc. (the “company”), an Ohio corporation, is the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, operating 768 retail stores in 47 states at November 1, 2008.

The company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. The fiscal year refers to the year in which the period ends (e.g., fiscal 2009 refers to the year-ended January 31, 2009). The 2009 fiscal year will include 52 weeks. Fiscal 2008 was also a 52-week year.

The consolidated interim financial statements include the accounts of the company and its subsidiaries and have been prepared without audit, pursuant to the rules of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures herein are adequate to make the information not misleading. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year-ended February 2, 2008.

Typical of most retail companies, the company’s business is highly seasonal with the majority of revenues and operating profits generated in the second half of the fiscal year. Accordingly, earnings or losses for a particular interim period are not indicative of full-year results. Due to the seasonal nature of the company’s business, a comparable balance sheet as of November 3, 2007 has been provided. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the interim periods presented.

Note 2 — Earnings (Loss) Per Share

Basic earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted earnings per common share include the effect of the assumed exercise of dilutive stock-based awards under the treasury stock method. Loss per common share does not include the effect of the assumed exercise of stock-based awards, since the effect would be anti-dilutive.

The following table presents information necessary to calculate basic and diluted income (loss) per common share (shares in thousands):


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	November 1,		November 3,		November 1,		November 3,
	2008		2007		2008		2007
Weighted average shares outstanding:
Basic common shares		25,044		24,407		24,792		24,247
Incremental shares from assumed exercise of stock options		262		290		254		—
Incremental restricted shares		432		314		389		—

Diluted common shares		25,738		25,011		25,435		24,247

For the third quarter and year-to-date period of fiscal 2009, the above calculation of the diluted net income per common share reflects the impact of stock options that had exercise prices below the average market price of the company’s common shares for the quarter. An average of 660,494 stock options for the third quarter and 717,086 stock options for the year-to-date period were not included in the computation of diluted net income per common share because the exercise price of the stock options exceeded the average market price and would have been anti-dilutive.

For the third quarter of fiscal 2008, an average of 747,854 stock options were not included in the computation of diluted net income per common share because the exercise price of the stock options exceeded the average market price and would have been anti-dilutive. For the year-to-date period of fiscal 2008, all outstanding stock-based awards were excluded from the calculation of diluted net loss per common share because they would have had an anti-dilutive effect due to the company’s net loss for this period.

Note 3 — Shareholders’ Equity

During the first thirty-nine weeks of fiscal 2009, shares outstanding increased by 711,000 as follows:


						Common		Additional							Total
	Common			Treasury		Stock Stated		Paid-In		Retained		Treasury			Shareholders’
	Shares			Shares		Value		Capital		Earnings		Stock			Equity
	(Shares in thousands)					(Dollars in millions)
Balance, February 2, 2008		24,485			3,587	$	1.4	$	194.6	$	288.5	$	(44.5	)	$	440.0
Net income		—			—		—		—		1.5		—			1.5
Exercise of stock options		406			—		—		4.1		—		—			4.1
Tax on equity compensation		—			—		—		1.7		—		—			1.7
Stock-based compensation		235			—		—		7.2		—		—			7.2
Purchase of common stock		(76	)		76		—		—		—		(1.3	)		(1.3	)
Associate Stock Ownership Plan		146			—		—		1.9		—		—			1.9

Year-to-date activity		711			76		—		14.9		1.5		(1.3	)		15.1

Balance, November 1, 2008		25,196			3,663	$	1.4	$	209.5	$	290.0	$	(45.8	)	$	455.1

As of November 1, 2008, the company had 1,783,950 stock options outstanding and 717,904 restricted stock awards issued but not yet vested.

Note 4 — Financing

On September 5, 2008, the company and certain of its subsidiaries (the “Company”) amended certain terms and extended the maturity of its Credit Facility, originally entered into as of April 24, 2001 (the “Amended Facility”). The Amended Facility, which expires on September 5, 2013, is a $300 million revolver with Bank of America, N.A. and seven other lenders and is secured by a first priority security interest in the company’s inventory, accounts receivable, personal property and other assets and is guaranteed by one other wholly-owned subsidiary of the company. The company has the option to request an increase in the size of the Amended Facility up to $100 million (for a total facility of $400 million) in increments of $25 million subject to certain conditions, as defined; however, the lenders under the Amended Facility are not under any obligation to provide any such additional increments. Interest on borrowings under the Amended Facility is calculated at either LIBOR plus 1.75 percent to 2.25 percent or the bank’s base rate plus 0.75 percent to 1.25 percent, both of which are dependent on the level of excess availability as defined in the credit agreement. The Amended Facility contains a sub-limit for letters of credit of $200 million. Deferred financing costs of $2.3 million, of which $0.4 million relates to the unamortized portion of the deferred financing costs of the previous Credit Facility, will be amortized over the term of the Amended Facility.

The Amended Facility contains customary covenants that, among other things, restrict the company’s ability to incur additional indebtedness or guarantee obligations, engage in mergers or consolidations, dispose of assets, make investments, acquisitions, loans or advances, engage in certain transactions with affiliates, create liens, or change the nature of its business. The company is restricted in its ability to prepay or modify the terms of other indebtedness, pay dividends and make other distributions when excess availability, as defined, falls below certain levels. Further, the company is required to comply with a minimum fixed charge ratio covenant, as defined, if excess availability is less than 10 percent of the borrowing base at any time. The Amended Facility also defines various events of default, including cross-default provisions, defaults for any material judgments or a change in control.

During the third quarter of fiscal 2009, the company purchased $20.4 million in face value of the 7.5 percent senior subordinated notes at 88.375% to par. The company recorded a pre-tax gain of $2.1 million for the cash discount received which was slightly offset by the related write-off of applicable deferred financing costs. These charges are reflected in the gain on repurchase of notes line item in the statement of operations.

Note 5 — Recent Accounting Pronouncements

Financial Accounting Standards Board Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”

In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”), which clarifies the application of Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (“SFAS 157”) when the market for a financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of SFAS 157 did not have an impact on the company’s consolidated financial statements.

Note 6 — Segment Reporting

At November 1, 2008, the company operated 208 large-format stores and 560 small-format stores. The company considers stores that generally average more than approximately 24,000 square feet of retail space as large-format stores. The company’s small-format stores generally average less than approximately 24,000 square feet. The size of the store is not the only decisive factor in determining its classification as large-format or small-format. The most important distinction is whether or not stores in the range have been recently built or remodeled and contain a broad assortment of craft categories.

The company’s reportable segments include large-format stores, small-format stores and other. The small-format stores offer a complete selection of fabric and a convenience assortment of crafts, artificial floral, finished seasonal and home décor merchandise. The large-format stores offer an expanded and more comprehensive product assortment than the small-format stores. The large-format stores also generally offer custom framing and educational programs that the small-format stores do not. The “other” category includes unallocated corporate assets and overhead in addition to the operating results of the company’s joann.com Internet business. The segments are evaluated based on revenues and operating profit contribution to the total corporation. All income and expense items below operating profit are not allocated to the segments and are not disclosed.

As permitted under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” certain information not routinely used in the management of these segments or information that is impractical to report is not shown. The company does not report assets other than property, equipment and leasehold improvements by segment because not all assets are allocated to segments for purposes of measurement by the company’s chief operating decision maker.


	Large-format		Small-format
(Dollars in millions)	Stores		Stores		Other			Consolidated
Thirteen Weeks Ended November 1, 2008
Net sales	$	247.2	$	224.8	$	8.1		$	480.1
Store pre-opening and closing costs		1.6		3.1		—			4.7
Depreciation and amortization		8.0		2.7		3.1			13.8
Operating profit (loss)		20.7		26.4		(29.8	)		17.3

Capital expenditures		11.3		4.4		5.7			21.4


Thirteen Weeks Ended November 3, 2007
Net sales	$	252.6	$	227.6	$	—		$	480.2
Store pre-opening and closing costs		0.5		1.0		—			1.5
Depreciation and amortization		7.9		2.2		3.1			13.2
Operating profit (loss)		21.0		27.4		(31.7	)		16.7

Capital expenditures		2.5		2.1		3.0			7.6


Thirty-Nine Weeks Ended November 1, 2008
Net sales	$	687.5	$	618.3	$	23.4		$	1,329.2
Store pre-opening and closing costs		4.4		5.6		—			10.0
Depreciation and amortization		23.6		7.2		9.3			40.1
Operating profit (loss)		41.9		63.4		(97.1	)		8.2

Capital expenditures		22.3		12.5		20.3			55.1
Property, equipment and leasehold improvements, net		157.4		37.4		116.8			311.6


Thirty-Nine Weeks Ended November 3, 2007
Net sales	$	675.8	$	617.1	$	—		$	1,292.9
Store pre-opening and closing costs		2.3		4.3		—			6.6
Depreciation and amortization		23.3		6.6		8.7			38.6
Operating profit (loss)		29.9		55.9		(95.2	)		(9.4	)

Capital expenditures		14.2		8.2		7.0			29.4
Property, equipment and leasehold improvements, net		169.8		38.4		93.7			301.9

Note 7 — Consolidating Financial Statements (Unaudited)

The company’s 7.5 percent senior subordinated notes and credit facility are fully and unconditionally guaranteed, on a joint and several basis, by certain of the wholly-owned subsidiaries of the company. The senior subordinated notes are subordinated to the company’s credit facility.

Summarized consolidating financial information of the company (excluding its subsidiaries) and the guarantor subsidiaries as of November 1, 2008 and February 2, 2008 and for the thirteen and thirty-nine weeks ended November 1, 2008 and November 3, 2007 is as follows:

Consolidating Balance Sheets
November 1, 2008


				Guarantor
	Parent			Subsidiaries			Eliminations			Consolidated
	(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents	$	(0.6	)	$	25.4		$	—		$	24.8
Inventories		235.9			286.4						522.3
Deferred income taxes		19.0			5.9						24.9
Prepaid expenses and other current assets		22.1			6.9						29.0

Total current assets		276.4			324.6			—			601.0

Property, equipment and leasehold improvements, net		165.0			146.6						311.6
Goodwill		11.8			—						11.8
Other assets		6.3			7.6						13.9
Investment in subsidiaries		77.3			—			(77.3	)		—
Intercompany receivable		360.8			—			(360.8	)		—

Total assets	$	897.6		$	478.8		$	(438.1	)	$	938.3


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	169.6		$	13.0		$	—		$	182.6
Accrued expenses		98.5			(3.6	)					94.9

Total current liabilities		268.1			9.4			—			277.5

Long-term debt		112.7			—						112.7
Lease obligations and other long-term liabilities		61.7			31.3						93.0
Intercompany payable		—			360.8			(360.8	)		—

Shareholders’ equity:
Preferred stock		—			—						—
Common stock		1.4			—						1.4
Additional paid-in capital		209.5			—						209.5
Retained earnings		290.0			77.3			(77.3	)		290.0

		500.9			77.3			(77.3	)		500.9
Treasury stock, at cost		(45.8	)		—						(45.8	)

Total shareholders’ equity		455.1			77.3			(77.3	)		455.1

Total liabilities and shareholders’ equity	$	897.6		$	478.8		$	(438.1	)	$	938.3

Note 7 — Consolidating Financial Statements (Unaudited) — CONTINUED

Consolidating Balance Sheets
February 2, 2008


				Guarantor
	Parent			Subsidiaries			Eliminations			Consolidated
	(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents	$	(1.0	)	$	26.4		$	—		$	25.4
Inventories		208.5			263.7						472.2
Deferred income taxes		20.1			6.3						26.4
Prepaid expenses and other current assets		17.8			6.0						23.8

Total current assets		245.4			302.4			—			547.8

Property, equipment and leasehold improvements, net		142.8			154.7						297.5
Goodwill		11.8			—						11.8
Other assets		12.8			(0.5	)					12.3
Investment in subsidiaries		70.9			—			(70.9	)		—
Intercompany receivable		355.5			—			(355.5	)		—

Total assets	$	839.2		$	456.6		$	(426.4	)	$	869.4


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	151.6		$	(6.3	)	$	—		$	145.3
Accrued expenses		96.5			0.6						97.1

Total current liabilities		248.1			(5.7	)		—			242.4

Long-term debt		100.0			—						100.0
Long-term deferred income taxes		(5.2	)		5.2						—
Lease obligations and other long-term liabilities		56.3			30.7						87.0
Intercompany payable		—			355.5			(355.5	)		—

Shareholders’ equity:
Preferred stock		—			—						—
Common stock		1.4			—						1.4
Additional paid-in capital		194.6			—						194.6
Retained earnings		288.5			70.9			(70.9	)		288.5

		484.5			70.9			(70.9	)		484.5
Treasury stock, at cost		(44.5	)		—						(44.5	)

Total shareholders’ equity		440.0			70.9			(70.9	)		440.0

Total liabilities and shareholders’ equity	$	839.2		$	456.6		$	(426.4	)	$	869.4

Note 7- Consolidating Financial Statements (Unaudited) — CONTINUED

Consolidating Statements of Operations
Thirteen Weeks Ended November 1, 2008 and November 3, 2007


	November 1, 2008
				Guarantor
	Parent			Subsidiaries		Eliminations			Consolidated
	(Dollars in millions)

Net sales	$	261.2		$	383.2	$	(164.3	)	$	480.1
Cost of sales (exclusive of depreciation and amortization shown separately below)		146.3			262.8		(164.3	)		244.8

Gross margin		114.9			120.4		—			235.3
Selling, general and administrative expenses		100.9			98.6					199.5
Store pre-opening and closing costs		2.8			1.9					4.7
Depreciation and amortization		7.2			6.6					13.8

Operating profit		4.0			13.3		—			17.3
Gain on repurchase of notes		(2.1	)		—		—			(2.1	)
Interest expense, net		1.2			1.4					2.6

Income before income taxes		4.9			11.9		—			16.8
Income tax provision		1.8			4.8					6.6

Income before equity income		3.1			7.1		—			10.2
Equity income from subsidiaries		7.1			—		(7.1	)		—

Net income	$	10.2		$	7.1	$	(7.1	)	$	10.2


	November 3 , 2007
			Guarantor
	Parent		Subsidiaries		Eliminations			Consolidated
	(Dollars in millions)

Net sales	$	262.5	$	388.2	$	(170.5	)	$	480.2
Cost of sales (exclusive of depreciation and amortization shown separately below)		147.1		273.1		(170.5	)		249.7

Gross margin		115.4		115.1		—			230.5
Selling, general and administrative expenses		98.4		100.7					199.1
Store pre-opening and closing costs		0.9		0.6					1.5
Depreciation and amortization		6.7		6.5					13.2

Operating profit		9.4		7.3		—			16.7
Interest expense, net		1.6		2.3					3.9

Income before income taxes		7.8		5.0		—			12.8
Income tax provision		2.5		2.3					4.8

Income before equity income		5.3		2.7		—			8.0
Equity income from subsidiaries		2.7		—		(2.7	)		—

Net income	$	8.0	$	2.7	$	(2.7	)	$	8.0

Note 7 — Consolidating Financial Statements (Unaudited) — CONTINUED

Consolidating Statements of Operations
Thirty-Nine Weeks Ended November 1, 2008 and November 3, 2007


	November 1, 2008
				Guarantor
	Parent			Subsidiaries		Eliminations			Consolidated
	(Dollars in millions)

Net sales	$	715.0		$	1,024.0	$	(409.8	)	$	1,329.2
Cost of sales (exclusive of depreciation and amortization shown separately below)		407.1			698.0		(409.8	)		695.3

Gross margin		307.9			326.0		—			633.9
Selling, general and administrative expenses		288.3			287.3					575.6
Store pre-opening and closing costs		5.9			4.1					10.0
Depreciation and amortization		20.4			19.7					40.1

Operating (loss) profit		(6.7	)		14.9		—			8.2
Gain on repurchase of notes		(2.1	)		—		—			(2.1	)
Interest expense, net		3.2			4.0					7.2

(Loss) income before income taxes		(7.8	)		10.9		—			3.1
Income tax (benefit) provision		(2.9	)		4.5					1.6

(Loss) income before equity income		(4.9	)		6.4		—			1.5
Equity income from subsidiaries		6.4			—		(6.4	)		—

Net income	$	1.5		$	6.4	$	(6.4	)	$	1.5


	November 3, 2007
				Guarantor
	Parent			Subsidiaries			Eliminations			Consolidated
	(Dollars in millions)

Net sales	$	706.9		$	965.6		$	(379.6	)	$	1,292.9
Cost of sales (exclusive of depreciation and amortization shown separately below)		396.9			667.1			(379.6	)		684.4

Gross margin		310.0			298.5			—			608.5
Selling, general and administrative expenses		286.3			286.4						572.7
Store pre-opening and closing costs		3.1			3.5						6.6
Depreciation and amortization		19.2			19.4						38.6

Operating profit (loss)		1.4			(10.8	)		—			(9.4	)
Interest expense, net		4.1			5.2						9.3

Loss before income taxes		(2.7	)		(16.0	)		—			(18.7	)
Income tax benefit		(1.2	)		(5.4	)					(6.6	)

Loss before equity loss		(1.5	)		(10.6	)		—			(12.1	)
Equity loss from subsidiaries		(10.6	)		—			10.6			—

Net loss	$	(12.1	)	$	(10.6	)	$	10.6		$	(12.1	)

Note 7 — Consolidating Financial Statements (Unaudited) — CONTINUED

Consolidating Statements of Cash Flows
Thirty-Nine Weeks Ended November 1, 2008 and November 3, 2007


	November 1, 2008
				Guarantor
	Parent			Subsidiaries			Eliminations		Consolidated
	(Dollars in millions)

Net cash provided by operating activities	$	24.1		$	10.8		$	—	$	34.9

Net cash flows used for investing activities:
Capital expenditures		(43.3	)		(11.8	)				(55.1	)

Net cash used for investing activities		(43.3	)		(11.8	)		—		(55.1	)

Net cash flows provided by financing activities:
Purchase of senior subordinated notes		(18.0	)		—					(18.0	)
Net change in revolving credit facility		33.1			—					33.1
Proceeds from stock-based compensation plans		6.0			—					6.0
Other, net		(1.5	)		—					(1.5	)

Net cash provided by financing activities		19.6			—			—		19.6


Net increase (decrease) in cash and cash equivalents		0.4			(1.0	)		—		(0.6	)
Cash and cash equivalents at beginning of period		(1.0	)		26.4			—		25.4

Cash and cash equivalents at end of period	$	(0.6	)	$	25.4		$	—	$	24.8


	November 3, 2007
				Guarantor
	Parent			Subsidiaries			Eliminations		Consolidated
	(Dollars in millions)

Net cash (used for) provided by operating activities	$	(57.0	)	$	13.1		$	—	$	(43.9	)

Net cash flows used for investing activities:
Capital expenditures		(15.6	)		(13.8	)				(29.4	)

Net cash used for investing activities		(15.6	)		(13.8	)		—		(29.4	)

Net cash flows provided by financing activities:
Net change in revolving credit facility		76.7			—					76.7
Proceeds from stock-based compensation plans		7.7			—					7.7
Other, net		(0.1	)		—					(0.1	)

Net cash provided by financing activities		84.3			—			—		84.3


Net increase (decrease) in cash and cash equivalents		11.7			(0.7	)		—		11.0
Cash and cash equivalents at beginning of period		(8.8	)		27.2			—		18.4

Cash and cash equivalents at end of period	$	2.9		$	26.5		$	—	$	29.4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion is intended to provide the reader with information that will assist in an overall understanding of our financial statements, changes in certain key indicators in those financial statements from year to year, the factors that account for those changes and how certain accounting principles have impacted our financial statements. This discussion should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements presented in our fiscal 2008 Annual Report on Form 10-K.

General Overview

We are the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. Our retail stores feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, paper crafting material, artificial floral, home accents, finished seasonal and home décor merchandise.

As of November 1, 2008, we operated 768 stores in 47 states (208 large-format stores and 560 small-format stores). We consider stores that generally average more than approximately 24,000 square feet of retail space as large-format stores. Our small-format stores generally average less than approximately 24,000 square feet. The size of the store is not the only decisive factor in determining its classification as large-format or small-format. The most important distinction is whether or not stores in the range have been recently built or remodeled and contain a broad assortment of craft categories.

Our large-format stores offer an expanded and more comprehensive product assortment than our small-format stores. Our large-format stores also generally offer custom framing and educational programs that our small-format stores do not. They average approximately 38,000 square feet and generated average net sales per store of approximately $4.9 million in fiscal 2008. As new large-format stores are opened, these new stores will average less than 38,000 square feet. Our small-format stores offer a complete selection of fabric and a convenience assortment of crafts, artificial floral, finished seasonal and home décor merchandise. They average approximately 14,700 square feet and generated average net sales per store of approximately $1.5 million in fiscal 2008.

Executive Overview

We performed better than many retailers, but we are not immune to the current market conditions. In response to the current market conditions, we are focusing on the control of internal operating variables. Controlling our internal operating variables has allowed us to deliver earnings growth over last year for the third quarter of fiscal 2009 and to continue to strengthen our balance sheet.

Sales trends began to soften in the third quarter of fiscal 2009 as evidenced in our same-store sales trend for fiscal 2009. Our 1.5% same-store sales decrease was in contrast to the 3.9% increase we delivered through the first half of the year. A slight drop in our store traffic accounted for most of our sales decrease. Sales in our basic sewing and craft categories continued to perform favorably. Sales within our sewing business were strong for the third quarter of fiscal 2009, particularly in the quilting, fleece and sportswear fabrics categories. Apparel crafts and food crafting remain strong on the non-sewing side of the business.

Weakness in the seasonal merchandise and higher ticket custom framing and home decorating fabric categories negatively impacted our sales trend in the third quarter. This weakness contributed to a downward trend in average ticket, resulting in a disproportionate impact on sales in our large-format stores, which have more space and inventory dedicated to these categories.

In spite of the sales trend, we continued to improve our inventory position and delivered year-over-year improvements in gross margin and earnings for the quarter. Total inventory was down $48.6 million or 8.5% compared to last year’s third quarter, while total sales were flat for the same period. Basic in-stocks are at record levels, while we continue to reduce the higher risk fashion and seasonal inventories.

Gross margin increased by 100 basis points in the quarter, due to a reduction in clearance activity as compared to the same period in the prior year and lower costs from global sourcing initiatives, particularly on fabrics.

Selling, general and administrative expenses (“SG&A”) increased slightly during the quarter as initiatives to tightly manage operating costs were offset by the de-leveraging of sales. In addition, we completed the roll out of our new point-of-sale system during the quarter. As a result of the new system, we incurred training costs during the quarter, which increased SG&A.

Our solid operating performance for the third quarter resulted in earnings of $0.40 per share, an improvement of $0.08 per share over the third quarter of the prior year. Included in the $0.08 earnings per share improvement is $0.05 earnings per share, net of tax, related to the gain from our senior subordinated note buyback. Our strong balance sheet and cash flow allowed us to retire $20.4 million of notes during the quarter, at favorable terms, resulting in the gain.

We opened 12 new stores during the third quarter of fiscal 2009. We opened six new stores early in the fourth quarter of fiscal 2009, bringing the total number of new store openings to 21 for the year. We also made progress in revitalizing our existing store base by completing six remodels during the quarter. We have now completed 28 small-format remodels this year. The remodels continue to deliver strong results, with sales growth typically exceeding our small-format store average by 10% in the first year after remodel. In addition, stores we remodeled two years ago are still experiencing sales trends at almost 3% above the company average this year.

We also completed 217 small-format store optimization projects during the third quarter of fiscal 2009. The store optimization projects involve re-merchandising stores that were too small to justify a full remodel. It is too early to quantify the benefit from this effort, but we expect to see some modest incremental sales from these stores in future periods.

Looking ahead to the remainder of fiscal 2009, we believe the negative trends for customer traffic and average ticket may continue. In addition, our seasonal merchandise categories typically represent a larger percent of our business during the fourth quarter. Weakness in this category will create additional downward pressure on overall sales trends. We expect the fourth quarter of fiscal 2009 to be challenging in light of current economic conditions.

We were conservative in purchasing holiday merchandise this year. We continue to closely monitor our holiday sales and sell-through rates, as well as competitive pricing activity, and we will take appropriate pricing actions in order to optimize sell-through rates and gross margin dollars.

The retail industry, as well as its suppliers, has been negatively impacted by the current economic challenges. We are experiencing it at Jo-Ann Stores as well. In the third quarter of fiscal 2009, our same-store sales trend turned negative for the first time in six quarters. However, we believe we are managing through this situation well. Sales in our core sewing and craft categories are steady. Our balance sheet is stronger than it has been in years and we continue to invest for future growth. We believe we are positioned to gain market share in both the sewing and craft categories.

Recent Developments and Business Update

Outlook for Fiscal 2009 and Fiscal 2010

We are updating our previously announced outlook for fiscal 2009. Based upon our results through the third quarter, our operating assumptions for the remainder of the year, an increasingly challenging retail environment and uncertain economic conditions, we have reduced our previously announced full-year guidance. The key considerations underlying our outlook for fiscal 2009 include:

	•		Same-store sales approximately flat for the year versus the previously announced range of 2.0% to 3.5% for the year;

	•		Gross margin rate improvement for the year;

	•		SG&A expense as a percentage of net sales will improve slightly versus the prior year;

	•		Capital expenditures for the full-year of approximately $60 million;

	•		Earnings per diluted share in the range of $0.75 to $0.85 for the year versus the previously announced range of $0.95 to $1.05; and

	•		Weighted-average diluted share count of approximately 25.5 million shares for the year.

For fiscal 2010, given the current economic environment, we expect to reduce capital spending from the fiscal 2009 year level of $60 million to approximately $35 million. We will continue to execute our strategic plan, which calls for revitalizing our store portfolio by opening new large-format stores and remodeling older small-format stores. At present, we expect that new store and remodel activity will be approximately the same level as this year, with roughly 20 new stores and 30 remodels. We will be closely monitoring the current uncertain economic conditions, and will adjust our new store and remodel plans if the economic conditions deviate significantly from our current expectations. Capital spending on information technology will be significantly lower next year, as well as discretionary spending for projects related to store operations and merchandising.

Goodwill

During the fourth quarter of fiscal 2008, we purchased the remaining 62% ownership interest in the joann.com website. This acquisition resulted in goodwill of $11.8 million. Under Statement of Financial Accounting Standards No. 142 (“SFAS”), Goodwill and Other Intangible Assets, goodwill should be reviewed for impairment at least annually and more frequently if indicators exist that would suggest that goodwill could be impaired. We considered the current economic environment to be an impairment indicator under SFAS No. 142. Accordingly, we performed an interim test of goodwill impairment in accordance with SFAS No. 142. Based on the results of this testing, the conclusion of which was reached based on consideration of the current economic environment and assessment of our near-term future performance, we concluded that our goodwill was not impaired as of November 1, 2008. We will perform our annual test for goodwill impairment during the fourth quarter of fiscal 2009. A continued downturn of general economic conditions and a related loss in value of our business could result in goodwill impairment.

Results of Operations

The following table sets forth our results of operations through operating profit (loss), expressed as a percentage of net sales. The following discussion should be read in conjunction with our consolidated interim financial statements and related notes thereto.


	Percentage of Net Sales
	Thirteen						Thirty-Nine
	Weeks Ended						Weeks Ended
	November 1,			November 3,			November 1,			November 3,
	2008			2007			2008			2007
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Gross margin		49.0	%		48.0	%		47.7	%		47.1	%
Selling, general and administrative expenses		41.6	%		41.5	%		43.3	%		44.3	%
Store pre-opening and closing costs		1.0	%		0.3	%		0.8	%		0.5	%
Depreciation and amortization		2.8	%		2.7	%		3.0	%		3.0	%

Operating profit (loss)		3.6	%		3.5	%		0.6	%		(0.7	)%

Comparison of the Thirteen Weeks Ended November 1, 2008 to November 3, 2007

Net Sales. Net sales for the third quarter of fiscal 2009 were $480.1 million compared with $480.2 million in the prior year. Same-store sales decreased 1.5% during the third quarter of fiscal 2009 versus a same-store sales increase of 2.4% in the third quarter last year. The decrease in same-store sales was driven primarily by a decrease in traffic and, to a lesser degree, lower average ticket.

Large-format store net sales for the third quarter of fiscal 2009 decreased 2.1% to $247.2 million from $252.6 million last year. Same-store sales for large-format stores decreased 3.8% for the quarter, versus a same-store sales increase of 2.4% in the third quarter last year. Large-format stores have a greater mix of seasonal product and higher ticket items, which had weak performance during the quarter.

Small-format store net sales for the third quarter of fiscal 2009 decreased 1.2% to $224.8 million from $227.6 million last year. Same-store sales performance for small-format stores increased 1.2% compared with a same-store sales increase of 2.4% for the third quarter of fiscal 2008. The increase in same-store sales was primarily due to higher average ticket. We continue to see the ongoing benefits from store remodels in our small-format stores. Sales in our basic sewing and craft categories continued to perform favorably.

Large-format stores accounted for approximately 51.5% of total third quarter net sales in fiscal 2009 as compared to 52.6% for the same period in the prior year. Small-format stores accounted for approximately 46.8% of total third quarter net sales in fiscal 2009 as compared to 47.4% for the same period in the prior year. Internet sales through joann.com accounted for the remaining 1.7% of third quarter net sales in fiscal 2009. During the third quarter of fiscal 2008, we were a minority owner of joann.com and therefore did not include its sales as part of total sales during that period.

On a category basis, our sewing businesses represented 54.2% of our fiscal 2009 third quarter net sales volume and increased 1.1% on a same-store sales basis over the third quarter of the prior year. We continued to experience positive same-store sales in the majority of our fabric and sewing notions merchandise categories, especially in quilting and fleece. Categories that negatively impacted same-store sales included home décor fabric and holiday fabric.

Our non-sewing businesses represented 45.8% of our fiscal 2009 third quarter net sales volume and decreased approximately 4.9% on a same-store sales basis over the third quarter of the prior year. The decrease was primarily due to declines in seasonal categories and custom framing.

Gross Margin. Gross margins may not be comparable to those of our competitors and other retailers. For instance, some retailers include all of the costs related to their distribution network and/or occupancy costs in cost of sales. We exclude a portion of the distribution network and occupancy costs from gross margin and include them within SG&A. As a percent of net sales, gross margin increased 100 basis points to 49.0% for the third quarter of fiscal 2009 compared with 48.0% for the same quarter last year. The improvement in the gross margin rate was primarily due to a smaller percentage of clearance sales to total sales in the third quarter of fiscal 2009 and lower costs from global sourcing initiatives, particularly on fabrics as compared to the same period of the prior year.

Selling, general and administrative expenses. SG&A expenses include store and administrative payroll, employee benefits, stock-based compensation, distribution costs, store occupancy costs, advertising expenses and administrative expenses. SG&A expenses, excluding other expenses separately identified in the statement of operations, were $199.5 million in the third quarter of fiscal 2009 compared with $199.1 million in the third quarter of the prior year. As a percentage of net sales, SG&A expense during the fiscal 2009 third quarter increased slightly to 41.6% of net sales compared with 41.5% of net sales in the third quarter of last year. The increase in SG&A is due primarily to de-leveraging of net sales and incremental store payroll for training related to our point-of-sale system roll out, offset to a large extent by initiatives to manage operating costs.

Store pre-opening and closing costs. Store pre-opening costs are expensed as incurred and relate to the costs incurred prior to a new store opening, which include lease costs recognized prior to the store opening, hiring and training costs for new employees and the cost of processing of initial merchandise. Store closing costs, which also are expensed as incurred, consist of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for employees, third-party inventory liquidator costs and other costs incidental to store closings. Store pre-opening and closing costs increased $3.2 million during the third quarter of fiscal 2009 to $4.7 million, compared with $1.5 million in the third quarter last year. During the third quarter of fiscal 2009, we opened six large-format stores and six small-format stores versus the same period last year when we opened one large-format store. We closed 12 small-format stores during the third quarter of fiscal 2009 versus the same period last year when we closed five small-format stores.

During the third quarter of fiscal 2009, we remodeled six stores, of which one was transitioned from a small-format to a large-format layout. During the third quarter of fiscal 2008, we remodeled five stores, of which none were transitioned from a small-format to a large-format layout.

Depreciation and amortization. Depreciation and amortization expense in the third quarter of fiscal 2009 increased $0.6 million to $13.8 million from $13.2 million for the third quarter of the prior year. The increase primarily is due to incremental depreciation associated with fiscal 2008 and 2009 expenditures related to technology as well as spending on new stores and remodels.

Operating profit. Operating profit was $17.3 million in the third quarter of fiscal 2009 compared with operating profit of $16.7 million in the same period of the prior year. The improvement in overall operating profit is primarily the result of the increase in gross margin due to reduced sales of clearance merchandise and lower costs from global sourcing initiatives, particularly related to fabrics.

Operating profit for large-format stores was $20.7 million in the third quarter of fiscal 2009 versus operating profit of $21.0 million in the third quarter last year. The decrease in large-format store operating profit was primarily the result of a decrease in same-store sales driven by a reduction in average ticket and traffic in addition to incremental store payroll for training related to the point-of-sale system roll out.

Operating profit for small-format stores was $26.4 million in the third quarter of fiscal 2009 versus $27.4 million in the third quarter last year. The decrease in operating profit was driven primarily by a decrease in the number of small-format stores as well as incremental store payroll for training related to the point-of-sale system roll out. During the third quarter of fiscal 2009, we closed 12 small-format stores.

Gain on repurchase of notes. Gain on repurchase of notes in the third quarter of fiscal 2009 was $2.1 million, pre-tax. The gain of $2.1 million was due to the repurchase of $20.4 million of our 7.5 percent senior subordinated notes at a discount of approximately 12% to par value offset slightly by the related write-off of applicable deferred financing costs.

Interest expense. Interest expense in the third quarter of fiscal 2009 decreased $1.3 million to $2.6 million from $3.9 million in the third quarter last year, primarily due to a decrease in our average borrowing levels. For the third quarter of fiscal 2009, our borrowing levels decreased to an average of $117 million from an average of $196 million outstanding in the third quarter of fiscal 2008.

Income taxes. Our effective income tax rate for the third quarters of fiscal 2009 and fiscal 2008 was 39.3% and 37.5%, respectively. Our effective tax rate is subject to change based on the mix of income from different state jurisdictions, which tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and update our estimate of the full-year effective rate as necessary.

Comparison of the Thirty-Nine Weeks Ended November 1, 2008 to November 3, 2007

Net Sales. Net sales for the first nine months of fiscal 2009 increased 2.8% to $1,329.2 million from $1,292.9 million in the prior year. Same-store sales increased 1.9% during the first nine months of fiscal 2009 compared with a same-store sales increase of 3.5% in the first nine months last year. The increase in sales was driven primarily by higher average ticket, slightly offset by a decrease in traffic. Increased average ticket was driven primarily by new product assortments, better in-stocks, and the benefit of competitor withdrawals from the sewing business.

Large-format store net sales for the first nine months of fiscal 2009 increased 1.7% to $687.5 million from $675.8 million last year. Same-store sales for large-format stores increased 0.3% for the first nine months of fiscal 2009, compared with a same-store sales increase of 4.6% in the first nine months last year. The increase in sales for large-format stores was due primarily to higher average ticket, partially offset by a slight decrease in traffic.

Small-format store net sales for the first nine months of fiscal 2009 increased 0.2% to $618.3 million from $617.1 million last year. Same-store sales performance for small-format stores increased 3.7% compared with a same-store sales increase of 2.6% for the same period in fiscal 2008. The increase in sales for small-format stores was driven by higher average ticket. In addition, customer transactions increased due to an improvement in our conversion rate, partially offset by a slight decrease in traffic. We continue to see the ongoing benefit from competitor withdrawals in the sewing business in our small-format stores as well as benefits realized from store remodels.

Large-format stores accounted for approximately 51.7% of total net sales for the first nine months of fiscal 2009 as compared to 52.3% for the same period in the prior year. Small-format stores accounted for approximately 46.5% of total net sales for the first nine months of fiscal 2009 as compared to 47.7% for the same period in the prior year. Internet sales through joann.com accounted for the remaining 1.8% of total net sales for the first nine months of fiscal 2009. During the first nine months of fiscal 2008, we were a minority owner of joann.com and therefore did not include its sales as part of total sales during that period.

On a category basis, our sewing businesses represented 52.5% of our net sales volume for the first nine months of fiscal 2009 and increased approximately 4.5% on a same-store sales basis over the first nine months of the prior year. We continued to experience positive same-store sales in the majority of our fabric and sewing notions merchandise categories, especially in quilting and fleece.

Our non-sewing businesses represented 47.5% of our net sales volume for the first nine months of fiscal 2009 and decreased approximately 1.4% on a same-store sales basis over the first nine months of the prior year. Declines in seasonal categories and custom framing were partially offset by gains in needle arts and basic craft categories.

Gross Margin. Gross margins may not be comparable to those of our competitors and other retailers. For instance, some retailers include all of the costs related to their distribution network and/or occupancy costs in cost of sales. We exclude a portion of the distribution network and occupancy costs from gross margin and include them within SG&A. As a percent of net sales, gross margin increased 60 basis points to 47.7% for the first nine months of fiscal 2009 compared with 47.1% for the same period last year. The increase is due primarily to the benefit of a smaller percentage of clearance sales to total sales during the first nine months of fiscal 2009 as compared to the same period of the prior year and lower costs from global sourcing initiatives, particularly related to fabrics.

Selling, general and administrative expenses. SG&A expenses include store and administrative payroll, employee benefits, stock-based compensation, distribution costs, store occupancy costs, advertising expenses and administrative expenses. SG&A expenses, excluding other expenses separately identified in the statement of operations, were $575.6 million in the first nine months of fiscal 2009 compared with $572.7 million in the prior year first nine months. As a percentage of net sales, SG&A expense during the first nine months of fiscal 2009 decreased 100 basis points to 43.3% of net sales, from 44.3% of net sales in the first nine months of last year. The decrease is primarily the result of expense leverage from the increase in sales as well as continued cost control efforts, slightly offset by incremental store payroll for training related to our point-of-sale system roll out.

While we will continue to place a diligent focus on controlling our costs, for the fourth quarter of fiscal 2009 we do not expect the same level of improvement that we experienced in the first half of fiscal 2009 as we cycle through last year’s expense reductions.

Store pre-opening and closing costs. Store pre-opening costs are expensed as incurred and relate to the costs incurred prior to a new store opening, which include lease costs recognized prior to the store opening, hiring and training costs for new employees and the cost of processing of initial merchandise. Store closing costs, which also are expensed as incurred, consist of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for employees, third-party inventory liquidator costs and other costs incidental to store closings. Store pre-opening and closing costs increased $3.4 million during the first nine months of fiscal 2009 to $10.0 million, compared with $6.6 million in the first nine months last year. During the first nine months of fiscal 2009, we opened nine large-format stores and six small-format stores and closed two large-format stores and 19 small-format stores versus the same period last year when we opened six large-format stores and closed 22 small-format stores. For fiscal 2009, we expect to open 21 new stores. We also expect to close approximately 30 stores.

During the first nine months of fiscal 2009, we remodeled 28 stores, of which five were transitioned from a small-format to a large-format layout. During the first nine months of fiscal 2008, we remodeled 26 stores, of which five were transitioned from a small-format to a large-format layout which completed the remodels for the full fiscal year of 2008.

We expect to remodel approximately 29 stores during the full fiscal year of 2009, of which five are expected to transition from a small-format to a large-format layout.

Depreciation and amortization. Depreciation and amortization expense in the first nine months of fiscal 2009 increased $1.5 million to $40.1 million from $38.6 million for the first nine months of the prior year. The increase is due to incremental depreciation associated with expenditures related to technology as well as spending on new stores and remodels.

Operating profit (loss). Operating profit was $8.2 million in the first nine months of fiscal 2009 versus an operating loss of $9.4 million in the same period of the prior year. The increase in overall operating profit is the result of a combination of growth in sales driven by higher average ticket due to new product assortments, better in-stocks, more effective marketing, the benefit of competitive withdrawals from the sewing business, the benefit of a smaller percentage of clearance sales to total sales as compared to the prior year, lower costs from global sourcing initiatives, particularly related to fabrics and our continued efforts to control expenses, slightly offset by incremental store payroll for training related to our point-of-sale system roll out.

Operating profit for large-format stores was $41.9 million in the first nine months of fiscal 2009 versus operating profit of $29.9 million in the first nine months last year. The improvement in large-format store operating profit was primarily the result of an increase in same-store sales driven by a higher average ticket combined with continued cost control efforts, slightly offset by incremental store payroll for training related to our point-of-sale system roll out.

Operating profit for small-format stores was $63.4 million in the first nine months of fiscal 2009 versus $55.9 million in the first nine months last year. The increase in operating profit was driven by an increase in same-store sales resulting primarily from a higher average ticket and an increase in customer transactions and disciplined cost controls, slightly offset by incremental store payroll for training related to our point-of-sale system roll out.

Gain on repurchase of notes. Gain on repurchase of notes in the first nine months of fiscal 2009 was $2.1 million, pre-tax. The gain of $2.1 million was due to the repurchase of $20.4 million in the third quarter of fiscal 2009 of our 7.5 percent senior subordinated notes at a discount of approximately 12% to par value offset slightly by the related write-off of applicable deferred financing costs.

Interest expense. Interest expense in the first nine months of fiscal 2009 decreased $2.1 million to $7.2 million from $9.3 million in the first nine months last year, primarily due to a decrease in our average borrowing levels. For the first nine months of fiscal 2009, our borrowing levels decreased to an average of $106 million from an average of $146 million outstanding in the first nine months of fiscal 2008.

Income taxes. Our effective income tax rate for the first nine months of fiscal 2009 and fiscal 2008 was 51.6% and 35.3%, respectively. Our effective tax rate is subject to change based on the mix of income from different state jurisdictions, which tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and update our estimate of the full-year effective rate as necessary.

Liquidity and Capital Resources

Our capital requirements are primarily for capital expenditures in connection with new store openings, store remodels, other infrastructure investments and working capital requirements for seasonal inventory builds and new store inventory purchases. Working capital requirements fluctuate during the year and reach their highest levels during the third fiscal quarter as we increase our inventory in preparation for our peak selling season during the months of September through December. These requirements are funded through a combination of internally generated cash flows from operations, credit extended by suppliers and borrowings under our credit facility.

We believe that the U.S. economy is facing very challenging times, and that general economic conditions could deteriorate further. We believe these conditions have had, and will continue to have, an adverse impact on spending by the customers we serve. Because of these challenges, we continue to review and adjust our business activities to address the changing economic environment and, as a result, we plan to prudently invest in our business, carefully manage inventory and liquidity and enforce expense controls. Due to the uncertainty in the overall economic environment and the unpredictability of consumer behavior, it is very difficult for us to predict how our business may perform in the future. Our business and financial performance may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, increased unemployment levels, higher energy and fuel costs, rising interest rates, financial market volatility and recession. In addition, because macro-economic factors can impact charges we are required to take relating to asset impairments, these events could lead to impairment charges.

The following table provides cash flow related information for the first nine months of fiscal 2009 and fiscal 2008:


Dollars in millions	2009			2008

Net cash provided by (used for) operating activities	$	34.9		$	(43.9	)
Net cash used for investing activities		(55.1	)		(29.4	)
Net cash provided by financing activities		19.6			84.3

Net (decrease) increase in cash and cash equivalents	$	(0.6	)	$	11.0

Ending cash and cash equivalents	$	24.8		$	29.4

Net cash provided by (used for) operating activities

Net cash provided by operations increased by $78.8 million to $34.9 million in the first nine months of fiscal 2009, compared with net cash used for operating activities of $43.9 million in the first nine months of fiscal 2008. The increase in cash provided by operations primarily was attributable to our continued improvements in working capital. We decreased inventory purchases in the first nine months of fiscal 2009 from year-end fiscal 2008 as compared to the same time period in fiscal 2008. Inventories increased $50.1 million in the first nine months of fiscal 2009, compared with a $117.5 million increase in the first nine months of fiscal 2008. Comparing inventory levels as of the end of the first nine months of fiscal year 2009 and 2008, inventories decreased $48.6 million, or 8.5%, year-over-year. The inventory decrease is primarily the result of a reduction in seasonal, fashion and clearance merchandise levels.

Net cash used for investing activities

Net cash used for investing activities totaled $55.1 million in the first nine months of fiscal 2009, compared with $29.4 million in the first nine months of fiscal 2008, and consisted entirely of capital spending for both periods. Capital expenditures consist of cash expenditures and cash expenditures reimbursed by landlords. Landlord-reimbursed capital expenditures represent the cost of assets acquired with landlord lease incentives. Capital expenditures are summarized as follows:


	Thirty-Nine Weeks Ended
	November 1,		November 3,
Dollars in millions	2008		2007

Cash	$	49.0	$	22.9
Cash — landlord reimbursed		6.1		6.5

Total	$	55.1	$	29.4

During the first nine months of fiscal 2009, we remodeled 28 stores as compared to 26 stores during the first nine months of fiscal 2008. We opened nine large-format stores and six small-format stores in the first nine months of fiscal 2009 as compared to the opening of six large-format stores in the first nine months of the prior year. Investment in information technology projects and store-related expenditures, including store remodels, represented the majority of the capital spending.

Net cash provided by financing activities

Net cash provided by financing activities was $19.6 million during the first nine months of fiscal 2009, compared with $84.3 million during the same period in fiscal 2008. During the third quarter of fiscal 2009, we purchased $20.4 million in face value of our 7.5 percent senior subordinated notes at 88.375% to par. We recorded a pre-tax gain of $2.1 million primarily for the cash discount received which was slightly offset by the related write-off of applicable deferred financing costs. These amounts are reflected in the gain on repurchase of notes line item in the statement of operations.

Borrowings were $112.7 million at the end of the first nine months of fiscal 2009; an increase of $12.7 from the beginning of the fiscal year and a decrease of $89.3 million from the end of the first nine months of fiscal 2008. The increase of $12.7 million from the beginning of the year was comprised of a $33.1 million increase in the revolving credit facility offset by the $20.4 million buyback of the senior subordinated notes. The decrease from the prior year was primarily the result of reduced inventory levels as well as other working capital improvements.

Our liquidity is based, in part, on our debt ratings. Currently, our long-term unsecured debt is rated “B3” by Moody’s Investor Service and “CCC+” by Standard & Poor’s Ratings Services. Moody’s rates our outlook as stable and Standard & Poor’s rate our outlook as positive. In May 2008, Standard & Poor’s raised our rating from “CCC” to “CCC+” and maintained their positive outlook. In December 2008, Moody’s raised our rating from “Caa2” to “B3” and changed their outlook from positive to stable. These changes by the rating agencies reflected the positive trends in our operating performance as well as our improved credit metrics. In assessing our credit strength, both Moody’s and Standard & Poor’s consider our capital structure and financial policies, as well as our consolidated balance sheet and other financial information. Downgrades of our credit ratings could adversely impact, among other things, our future borrowing costs, access to capital markets and new store operating lease costs, although we anticipate no short-term effect under our current credit arrangements.

On September 5, 2008, we and certain of our subsidiaries amended certain terms and extended the maturity of our Credit Facility, originally entered into as of April 24, 2001 (the “Amended Facility”). The Amended Facility, which expires on September 5, 2013, is a $300 million revolver with Bank of America, N.A. and seven other lenders and is secured by a first priority security interest in our inventory, accounts receivable, personal property and other assets and is guaranteed by one other of our wholly-owned subsidiaries. We have the option to request an increase in the size of the Amended Facility of up to $100 million (for a total facility of $400 million) in increments of $25 million subject to certain conditions, as defined; however, the lenders under the Amended Facility are not under any obligation to provide any such additional increments. Interest on borrowings under the Amended Facility is calculated at either LIBOR plus 1.75 percent to 2.25 percent or the bank’s base rate plus 0.75 percent to 1.25 percent, both of which are dependent on the level of excess availability as defined in the credit agreement. The Amended Facility contains a sub-limit for letters of credit of $200 million. Deferred financing costs of $2.3 million, of which $0.4 million relates to the unamortized portion of the deferred financing costs of the previous Credit Facility, will be amortized over the term of the Amended Facility.

The Amended Facility contains customary covenants that, among other things, restrict our ability to incur additional indebtedness or guarantee obligations, engage in mergers or consolidations, dispose of assets, make investments, acquisitions, loans or advances, engage in certain transactions with affiliates, create liens, or change the nature of our business. We are restricted in our ability to prepay or modify the terms of other indebtedness, pay dividends and make other distributions when excess availability, as defined, falls below certain levels. Further, we are required to comply with a minimum fixed charge ratio covenant, as defined, if excess availability is less than 10 percent of the borrowing base at any time. The Amended Facility also defines various events of default, including cross-default provisions, defaults for any material judgments or a change in control.

As of November 1, 2008, we had the ability to borrow $247 million under our Amended Facility, subject to the borrowing base calculation, as defined. Our debt-to-capitalization ratio was 19.8% at November 1, 2008, 18.5% at February 2, 2008 and 32.9% at November 3, 2007.

Off-Balance Sheet Transactions

Our liquidity is currently not dependent on the use of off-balance sheet transactions other than letters of credit and operating leases, which are typical in a retail environment.

Seasonality and Inflation

Our business exhibits seasonality, which is typical for most retail companies. Our net sales are much stronger in the second half of the year than the first half of the year. Net earnings are highest during the months of September through December when sales volumes provide significant operating leverage. Working capital requirements needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season.

We believe that inflation has not had a significant effect on net sales or on our earnings performance. There can be no assurance, however, that our operating results will not be affected by inflation in the future.

Critical Accounting Policies

Our condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical can be found in our fiscal 2008 Annual Report on Form 10-K in the notes to the consolidated financial statements and the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Contractual Obligations

There have been no material changes to the table of contractual obligations and commitments presented on page 34 of our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

Cautionary Statement Concerning Forward-Looking Statements

Certain statements contained in this report that are not historical facts are forward-looking statements within the meaning of that term set forth in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which reflect our current views of future events and financial performance, involve certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “estimates,” “expects,” “believes,” and similar expressions as they relate to us or future events or conditional verbs such as “will,” “should,” “would,” “may,” and “could” are intended to identify such forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. Our actual results, performance or achievements may differ materially from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, the items described in “Item 1A. Risk Factors” of our fiscal 2008 Annual Report on Form 10K, as well as general economic conditions, changes in customer demand, changes in trends in the fabric and craft industry, seasonality, failure to manage new store growth and the store transition strategy, the availability of merchandise, changes in the competitive pricing for products, the impact of competitors’ store openings and closings and changes in product offerings, longer-term unseasonable weather or widespread severe weather, our ability to effectively manage our distribution network, our ability to recruit and retain highly qualified personnel, our ability to sell-through our inventory at acceptable prices, energy costs, increases in transportation costs, our indebtedness and limits on obtaining additional financing, failure to maintain the security of our electronic and other confidential information, failure to comply with various laws and regulations, consumer confidence and debt levels, and other capital market and geo-political conditions. We caution readers not to place undue reliance on these forward-looking statements. We assume no obligation to update any of the forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The market risk of our financial instruments as of November 1, 2008 has not significantly changed since February 2, 2008. Information regarding our financial instruments and market risk as of February 2, 2008 is disclosed in our fiscal 2008 Annual Report on Form 10-K.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of Jo-Ann Stores, Inc. (the “Management”), including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In connection with the preparation of this Quarterly Report on Form 10-Q as of November 1, 2008, an evaluation was performed under the supervision and with the participation of our Management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various litigation matters in the ordinary course of our business. We are not currently involved in any litigation that we expect, either individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

Item 1A. Risk Factors

Except as set forth below, there were no material changes to the risk factors disclosed in our Annual Report on Form 10-K for our fiscal year ended February 2, 2008.

The effect of general economic conditions and the current financial crisis

Recent distress in the financial markets has resulted in declines in consumer confidence and spending, extreme volatility in securities prices, diminished liquidity and credit availability and declining valuations of certain investments. If the national or global economy or credit market conditions in general were to deteriorate further in the future, it is possible that such changes could put additional negative pressure on consumer spending, affecting our cash flows. There can be no assurance that our liquidity will not be affected by changes in the financial markets and the global economy.

While we do not anticipate that we will need additional financing or equity during the next fiscal year, tightening of the credit markets could make it more difficult for us to enter into agreements for new indebtedness or obtain funding through the issuance of our securities. The effects of these changes could also require us to make additional changes to our current plans and strategy.

In addition, the current credit crisis is having a significant negative impact on businesses around the world, and the impact of this crisis on our major suppliers cannot be predicted. The inability of key suppliers to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver merchandise or services. If we are unable to procure products and services when needed, or if we experience further deterioration in sales traffic in our stores over an extended period of time, our sales and cash flows could be negatively impacted in future periods. Any prolonged deterioration in sales could also result in the future impairment of goodwill and long-lived assets.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by Jo-Ann Stores, Inc.


					Total Number of		Maximum Number
					Shares Purchased		of Shares that May
	Total Number		Average		as Part of Publicly		Yet Be Purchased
	of Shares		Price Paid		Announced Plans		Under the Plans
	Purchased		per Share		or Programs		or Programs
August 3 – 30, 2008		3,876	$	22.83		1,101,691		1,048,309
August 31 – October 4, 2008		1,018	$	25.32		1,102,709		1,047,291
October 5 – November 1, 2008		134	$	17.71		1,102,843		1,047,157

Total		5,028	$	23.20		1,102,843		1,047,157

In December 1998, our Board of Directors authorized a discretionary program that allowed us to buy back 2,150,000 common shares. That program does not have a stated expiration date. In the table above, the total number of shares purchased represents shares repurchased directly from the market, as well as shares repurchased from employees related to the lapse of restricted shares that were provided to us to satisfy minimum statutory tax withholding requirements.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.


No.		Exhibit Description
	10.1	Amended and Restated Credit Agreement, dated as of September 5, 2008, among the Company as Lead Borrower, the Lenders party thereto, Bank of America, N.A., as Issuing Bank, Administrative Agent and Collateral Agent, Wells Fargo Retail Finance, LLC, National City Business Credit, Inc. and U.S. Bank National Association, as Co-Documentation Agents, and Banc of America Securities LLC, as Sole Lead Arranger and Book Manager.
	31.1	Section 302 Certification By Chief Executive Officer.
	31.2	Section 302 Certification By Chief Financial Officer.
	32.1	Section 906 Certification of Principal Executive Officer and Principal Financial Officer.


	JO-ANN STORES, INC.
DATE: December 11, 2008	/s/ Darrell Webb
	Darrell Webb,
	President and Chief Executive Officer

	/s/ James Kerr
	James Kerr,
	Executive Vice President and Chief Financial Officer


No.		Exhibit Description
	10.1	Amended and Restated Credit Agreement, dated as of September 5, 2008, among the Company as Lead Borrower, the Lenders party thereto, Bank of America, N.A., as Issuing Bank, Administrative Agent and Collateral Agent, Wells Fargo Retail Finance, LLC, National City Business Credit, Inc. and U.S. Bank National Association, as Co-Documentation Agents, and Banc of America Securities LLC, as Sole Lead Arranger and Book Manager.
	31.1	Section 302 Certification By Chief Executive Officer.
	31.2	Section 302 Certification By Chief Financial Officer.
	32.1	Section 906 Certification of Principal Executive Officer and Principal Financial Officer.

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	Page Numbers

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets — November 1, 2008 (Unaudited), November 3, 2007 (Unaudited) and February 2, 2008		1

Unaudited Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended November 1, 2008 and November 3, 2007		2

Unaudited Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended November 1, 2008 and November 3, 2007		3

Notes to Unaudited Consolidated Financial Statements		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3. Quantitative and Qualitative Disclosures about Market Risk		24

Item 4. Controls and Procedures		24

Part II. Other Information

Item 1. Legal Proceedings		24

Item 1A. Risk Factors		24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25

Item 3. Defaults Upon Senior Securities		25

Item 4. Submission of Matters to a Vote of Security Holders		25

Item 5. Other Information		26

Item 6. Exhibits		26

Signatures		27

Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1